Figure 13-5 -Refer to Figure 13-5. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment and Y* = equilibrium real GDP. Suppose AE = C + I_P, I_P is autonomous and the consumption function is C = $1,000 billion + 0.75Y. If firms produced a real GDP less than the Y*, A) AE would be greater than real GDP. B) AE would fall short of real GDP. C) actual investment would be greater than I_P. D) there would be an excess supply real GDP.

Question

Quizplus · Accepted Answer

If firms produced a real GDP less than Y*, aggregate expenditures (AE) would be greater than the real GDP because the consumption and investment planned at Y* are based on a higher level of output. This leads to an excess demand situation, not excess supply, and actual investment remains at its autonomous level, not affected by the short-term production decision.

Figure 13-5 -Refer to Figure 13-5. Let Y = Real GDP, AE